EX-99 3 c67239ex99.txt SHAREHOLDERS' LETTER EXHIBIT 99 [FIRST INTERSTATE BANCSYSTEM LOGO] [PHOTO] FOURTH QUARTER 2001 To our shareholders, It's exciting to announce First Interstate BancSystem has achieved record earnings for the 13th consecutive year! The company earned $31,183,000 in 2001, a 3% increase over last year. Diluted earnings per share was also a record $3.94, up $.16 from last year. Return on average common equity declined from 16.83% last year to 14.89% in 2001. The decline is the result of increased equity from retention of earnings plus additional capital from the mark to market adjustment on our investment security portfolio. We all experienced increased uncertainty during 2001: eleven rate reductions by the Federal Reserve Bank, the tragic global event on September 11th, weekly announcements of layoffs by companies and the largest bankruptcy in United States history in December. There have also been several significant and unplanned variances within our business, both positive and negative. FIRST, although we have a long history of focusing on growth of deposits and loans, 2001 proved to be excellent, exceeding expectations. Loans at the end of 2001 were 9.4% or $186 million higher than 2000 year end. Deposits at the end of 2001 were 14.5%, or $343 million higher than 2000 year end. Second, our net interest margin improvement of 7 basis points over last year was a large factor in achieving record earnings in 2001. Early in the year, we focused on the net interest margin with the anticipation of declining interest rates. As such, branch personnel were proactive at managing rates during this volatile interest rate period, and when combined with a steeped yield curve, resulted in an improved margin over 2000. Third, as residential real estate interest rates declined to 40 year lows during the year and the housing market remained strong, fee income from refinancing of residential loans held for sale and residential origination fees increased $4.1 million, or 170%, higher than last year. However, there were also negative influences which mitigated many of the gains identified above and may adversely effect 2002 results. First, we increased our provisions for loan losses while experiencing higher net charge-offs. The provision for loan losses of $7,843,000 was an increase of $2,563,000 from 2000 and net charge-offs increased to $6,571,000 from $3,078,000 in 2000. SECOND, the record high refinancing activity of residential mortgages resulted in a write-down of $1,143,000 of mortgage servicing rights. Third, non-interest expense increased $18,926,000, or 19%, due in large part to our banks' internal growth, the opening of fourteen de novo branches since January 2000, the acquisition of the Cheyenne bank in July 2000 and the $1.1 million impairment on mortgage servicing rights. The increase in non-interest expense has negatively impacted our efficiency ratio which was 67.87% this year, compared to 65.73% last year. Fourth, with the significant decline in market value of trust assets, caused by lower stock market values, and a change in pricing of investment brokerage services during 2001, investment service fee income declined $563,000, or 9%. FOURTH QUARTER Although earnings for the quarter ended December 31, 2001 were down from the third quarter's record results, it was the largest fourth quarter earnings ever recorded. Fourth quarter earnings were $7.7 million, or $.98 per diluted common share in 2001, up $48 thousand, or $.02 per diluted common share, from the same period last year. Return on average common equity was 13.83% in the fourth quarter 2001, as compared to 16.11% in the fourth quarter 2000. The current quarter's earnings of $7.7 million, reflects an 11 basis point increase in net interest margin from the fourth quarter 2000. The fourth quarter provision for loan losses of $3.0 million was $1.4 million more than the fourth quarter 2000. Non-interest income was up 24%, primarily due to increased fees on residential real estate loans and revenue from our new subsidiary, FI Reinsurance. Non-interest expense was up 23% from the same period last year, largely due to branch openings, FI Reinsurance, and impairment of mortgage servicing rights. Based upon fourth quarter's net income, a dividend of $.30 per share was paid to all shareholders of record on January 15, 2002. The successful merge of our two banking charters occurred in November. This merger adds to our customers' convenience and improves our operating efficiencies. We formed FI Reinsurance during the fourth quarter. This new entity provides reinsurance on credit life and accidental insurance sold to our customers. In spite of the global and local uncertainties, we have achieved a new high mark! Thank you to all employees for the record results in 2001. The results truly reflect a great team effort. While we celebrate the successes of this current year, our vision remains fixed on our future. Given the continued commitment of our outstanding team of employees, shareholders, and directors, First Interstate is well positioned for the future. /s/ LYLE R. KNIGHT /s/ TERRILL R. MOORE Lyle R. Knight Terrill R. Moore President Chief Financial Officer Chief Operating Officer PERFORMANCE SNAPSHOT Three months ended December 31
in thousands except per share data 2001 2000 % CHANGE ---------------------------------- ---- ---- -------- (unaudited) OPERATING RESULTS Net income 7,729 7,681 0.6% Diluted earnings per share 0.98 0.96 2.1% Dividends per share 0.34 0.30 13.3% PERIOD END BALANCES Assets 3,314,716 2,933,262 13.0% Loans 2,157,968 1,972,323 9.4% Investment Securities 693,178 613,708 12.9% Deposits 2,708,613 2,365,225 14.5% Common Stockholders' Equity 222,069 197,986 12.2% Common Shares Outstanding 7,849 7,899 -0.6% QUARTERLY AVERAGES Assets 3,266,121 2,903,349 12.5% Loans 2,115,805 1,954,610 8.2% Investment Securities 685,775 577,875 18.7% Deposits 2,650,764 2,358,235 12.4% Common Stockholders' Equity 221,712 189,727 16.9% Common Shares Outstanding 7,857 7,908 -0.6%
[PHOTO] FOURTH QUARTER 2001 CONDENSED CONSOLIDATED STATEMENTS OF INCOME In thousands, except per share data (unaudited)
THREE MONTHS TWELVE MONTHS ENDED ENDED DECEMBER 31 DECEMBER 31 2001 2000 2001 2000 ---- ---- ---- ---- Total interest income $ 53,188 56,473 219,126 211,797 Total interest expense 19,458 27,759 93,984 101,789 -------- ------ ------- ------- Net interest income 33,730 28,714 125,142 110,008 Provision for loan losses 3,026 1,582 7,843 5,280 -------- ------ ------- ------- Net interest income after provision for loan losses 30,704 27,132 117,299 104,728 Non interest income 15,047 12,166 52,034 44,151 Non interest expense 33,363 27,122 120,249 101,323 -------- ------ ------- ------- Income before taxes 12,388 12,176 49,084 47,556 Income taxes 4,659 4,495 17,901 17,176 -------- ------ ------- ------- NET INCOME $ 7,729 7,681 31,183 30,380 ======== ====== ======= ======= COMMON SHARE DATA: Diluted earnings per share 0.98 0.96 3.94 3.78 Dividends 0.34 0.30 1.18 1.11 Book value ............................................. 28.29 25.06 Tangible book value .................................... 23.34 19.69 Appraised value ........................................ * 39.00 * Currently not available, $42.00 as of September 30, 2001 KEY PERFORMANCE RATIOS Return on avg common equity 13.83% 16.11% 14.89% 16.83% Return on avg common equity excluding market adj of securities 14.30% 15.78% 15.17% 16.30% Return on avg assets 0.94% 1.05% 1.01% 1.10% Net interest margin, FTE 4.69% 4.58% 4.66% 4.59% Efficiency ratio 68.40% 66.35% 67.87% 65.73% CREDIT QUALITY Annualized net charge offs to average loans 0.32% 0.17% Allowance for loan losses to loans 1.58% 1.66% Allowance for loan losses to non-accruing loans 170.65% 154.59% CAPITAL ADEQUACY & LIQUIDITY Leverage capital ratio 6.74% 6.95% Avg loans to avg deposits 82.06% 84.42%
[FIRST INTERSTATE BANCSYSTEM LOGO] CONDENSED CONSOLIDATED BALANCE SHEET In thousands (unaudited)
12/31/2001 12/31/2000 ---------- ---------- ASSETS Cash and due from banks ..................... $ 152,609 166,964 Federal funds sold .......................... 82,185 1,510 Interest bearing deposits ................... 58,242 771 Investment securities ....................... 693,178 613,708 Loans ....................................... 2,157,968 1,972,323 Less: allowance for loan losses ............. 34,091 32,820 ----------- --------- Net loans ................................... 2,123,877 1,939,503 Premises & equipment, net ................... 91,346 91,075 Accrued interest receivable ................. 24,804 28,442 Goodwill .................................... 38,850 42,481 Other real estate ........................... 414 3,028 Other assets ................................ 49,211 45,780 ----------- --------- TOTAL ASSETS ................................ $ 3,314,716 2,933,262 =========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits .................................... 2,708,613 2,365,225 Fed funds purchased ......................... 625 19,535 Securities sold under agreement to repurchase ..................... 271,952 229,078 Other liabilities ........................... 29,031 33,300 Other borrowed funds ........................ 8,095 11,138 Long - term debt ............................ 34,331 37,000 Trust preferred securities .................. 40,000 40,000 ----------- --------- TOTAL LIABILITIES ........................... 3,092,647 2,735,276 Common Stockholders' equity ................. 222,069 197,986 ----------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................ $ 3,314,716 2,933,262 =========== =========
[EARNINGS PER SHARE CHART]